Cash & Investment Management

Blockchain – Q4 2016

Tuesday 8th November 2016

In recent years we have had excitement about new digital currencies such as Bitcoin. However the aspect that makes Bitcoin work, the public online ledgers, has now become the new hot topic in its own right. Crucially, Bitcoin is open source, which means that it is constantly being worked on by developers.  It is called Blockchain, which is the technology for a new generation of transactional applications that establishes trust, accountability and transparency while streamlining business processes. It can be used to share a ledger across the business network. The network will be private to the parties concerned, permissioned so only authorized parties are allowed to join, and secure using cryptographic technology to ensure that participants only see what they are allowed to see. Some of the statistics are impressive, for instance the World Economic Forum has predicted that, by 2027, 10% of global GDP is likely to be stored on blockchain platforms.

By storing data across its network, the blockchain eliminates the risks that come with data being held centrally. Its network lacks centralized points of vulnerability that computer hackers can exploit. Every node in a decentralized system has a copy of the blockchain. No centralized “official” copy exists and no user is “trusted” more than any other.

According to IBM, it has the potential to vastly reduce the cost and complexity of cross-enterprise business processes. The distributed ledger makes it easier to create cost-efficient business networks where virtually anything of value can be tracked and traded—without requiring a central point of control. It is fully auditable, which is a very powerful proposition. The application of this emerging technology is showing great promise across a broad range of business applications. For example, blockchain allows securities to be settled in minutes instead of days. It can also be used to help companies manage the flow of goods and related payments, or enable manufacturers to share production logs with OEMs and regulators to reduce product recalls.

Asset ownership and transfer between businesses is currently inefficient, slow, costly and vulnerable to manipulation. Everyone has their own ledger where discrepancies between business parties can increase settlement times. The shared ledger will be more robust, since it is replicated and distributed. All transactions against the ledger will require consensus across the network, where provenance of information is clear and transparent. Transactions will be immutable (unchangeable) and final. Some blockchain implementations enable the coding of contracts that will execute when specified conditions are met. For instance, a derivative could be paid out when a financial instrument meets a certain benchmark, with the use of blockchain technology, and bitcoin enabling the pay out to be automated.

Some major developments in the technology include a number of different uses and underlying sectors. At the moment there is a consortium of more than forty banks, including Barclays and JP Morgan, which are investigating blockchain for use in money transfers, record keeping and other back-end functions. If banks and other financial institutions are able to speed up transactions and take costs out of the system, it should mean cheaper, more efficient services for us. For example, sending money abroad could become almost instantaneous. According to a report published by Santander InnoVentures last year, the technology could cut bank infrastructure costs for cross-border payments, securities trading and regulatory compliance by $15 billion to $20 billion a year by 2022.

Everledger is using blockchain to develop a system of warranties that enable mining companies to verify that their rough-cut diamonds are not being used by militias to fund conflicts, and that they comply with the Kimberley Process – a government and community-backed certification scheme for diamonds.

Various regulatory bodies in the music industry have started testing models that use blockchain technology for royalty collection and management of copyrights around the world. The Walt Disney Company for instance, is embracing blockchain in a big way, and not just for accepting cryptocurrency at its parks. They released a platform called Dragonchain, a distributed crypto ledger framework protocol that makes it easy to create cost-efficient business networks where virtually anything of value can be tracked and traded–without requiring a central point of control.

Finally, a start-up company out of the UK is working on a blockchain solution to track tuna in order to verify that it is sustainably and responsibly-caught – something that is difficult, if not impossible, for a consumer to know with certainty today.

Investors have now realised the blockchain is bigger than Bitcoin. In the first quarter of 2016, venture-capital investment in blockchain start-ups overtook that in pure-play Bitcoin companies for the first time, according to industry researcher CoinDesk, which has tallied $1.1 billion (£840m) in deals to date.

From an Isle of Man perspective, it will be interesting to see how the self-styled ‘Bitcoin Island’ will seek to gain an advantage in blockchain. This will clearly impact incumbent businesses and possible new ventures.